Rio Tinto boss quits over £8.7bn write-down

The UK-based company expects to recognise a non-cash impairment charge of US$14bn in its 2012 full year results, including US$3bn relating to Rio Tinto Coal Mozambique (RTCM) and reductions in the carrying values of Rio Tinto's aluminium assets in the range of US$10-11bn.

Rio Tinto chairman Jan du Plessis said in a statement to the market that the scale of the write-down relating to the company's recent Alcan aluminium group and Mozambican coal-mining acquisitions was “unacceptable”.

Following the bad deals Albanese, who has been at the company for more than 30 years, said accountability for the hit rested with him.

Doug Ritchie, who led the acquisition and integration of the Mozambique coal assets, as head of Rio Tinto's energy division also resigned. This followed the retirement of the company’s CFO, Guy Elliott, in July last year.

Sam Walsh, chief executive of the company’s iron ore business, will take over from Albanese.

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The company purchased Canadian aluminium giant Alcan in 2007 at the top of the market for US$38bn, but the deal turned bad as markets fell apart and aluminium prices dropped.

Albanese had also spearheaded a deal to buy the Mozambique-focused coal miner Riversdale in 2011, but the company has since come up against challenging infrastructure problems in the country.

The final amount of write-downs, which include around US$500m of smaller asset write-downs, will be revealed in Rio Tinto's full-year results on 14 February.

News of the chief executive’s departure resulted in shares in the company falling more than 4% when stock markets in London opened and later recovering some of their losses to trade down by around 1.7%.

Just two days ago Mining Journal reported that Rio Tinto had set a new annual record for global iron ore production in 2012, 4% higher than in 2011. However it reported mixed results for its coal and copper divisions, posting a 16% increase in thermal coal production and a 9% decrease in coking coal production.

The impairments outlined in the company’s recent statement to the market revealed that infrastructure constraints, combined with a downward revision to estimates of recoverable coking coal volumes on the RTCM tenements, led to a reassessment of the overall scale and ramp up schedule of RTCM, and consequently to the impairment.

Firms operating in strong institutional and enforcement settings recognise impairments in corporate earnings on a more timely basis than those based in jurisdictions where regulatory scrutiny is anticipated to be weaker

Compliance with disclosure requirements is uneven and appears to be shaped by both the institutional environment of a country as well as company-specific factors such as the type of audit firm

Ben MacGregor of Company Reporting also provided some analyst commentary on the wider lessons from the Rio Tinto experience and more in general about impairment reporting practices.

He told AccountingWEB: “Two areas of movement recently In relation to accounting for business combinations have been increased disclosure of the composition of goodwill under former IFRS 3 "Business combinations" and disclosure of the reasons for business combinations under revised IFRS 3. These should assist in holding management accountable for acquisitions.”

“Looking at related disclosures in the mining sector, we noted that BHP Billiton recognised an impairment loss relating to a prior year acquisition in its June 2012 accounts. There have been increased impairment test disclosures by Glencore in December 2011 in relation to associates whose market value fell before carrying amount, but without actual impairment. Anglo American in 2010 increased impairment test disclosures on its assumptions. We have also noted some increase in going concern issues by mining companies such as Aquarius Platinum and Lonmin,” he said. “Together, these suggest that accounting requirements are giving some forewarning of potential problems in the sector.”

Company Reporting analysts also noted that the Alcan acquisition that has been impaired took place in October 2007, i.e. before the 2008 downturn. “There was a sizeable impairment (US$7.4bn) in 2011 (none in 2010 or 2009), with some relevant disclosure about sensitivity.”

Mounting pressure over goodwill

This week the European Securities and Markets Authority (ESMA) questioned why weak economic conditions had not caused heavier write-downs.

The watchdog warned European companies, ahead of many 2012 results, after it found losses taken on past deals were suspiciously low.

Steven Maijoor, chairman of the ESMA, said: “Issuers tend to be slow in recognising losses. Economic circumstances have changed fundamentally in the past years and that needs to be reflected.”

Listed EU companies must undergo an annual impairment test to see if its value has decreased. Deteriorating conditions can trigger write-downs by reducing cashflow that assets are expected to generate.

In order to improve the overall disclosure provided by issuers, ESMA recommends that issuers:

Better specify the key assumptions used in the impairment test

Include sensitivity analyses with sufficient detail and transparency, especially in situations when indicators are present that impairment might have occurred

Determine the growth rates used to extrapolate cash flows projections based on budgets and forecasts

Disclose specific discount rates for each material cash-generating unit rather than average discount rates